Italy Has Room for ‘Smart’ Fiscal Easing, UniCredit Says

Feb. 27 (Bloomberg) -- Any new Italian government would
have room to cut taxes to foster political support for reforms
provided it was done in a smart way, said Erik Nielsen,
UniCredit global chief economist.

“The primary surplus is very robust, Italy has some room
for easing,” Nielsen said at a Bloomberg panel in London today.
“As long as there’s no backpedaling, no big silly fiscal
expansion. It might not be a bad thing to let the economy
stabilize.”

A general election in Italy this week produced a hung
parliament and triggered a sell-off of Italian bonds, after
anti-austerity parties led by former Prime Minister Silvio
Berlusconi and comedian Beppe Grillo won about 55 percent of the
vote. Grillo has since rejected a call by Democratic Party
leader Pier Luigi Bersani to back a coalition.

“What Italy needs is a stable government -- whether it’s
center right or center left as an investor I wouldn’t really
worry too much,” Nielsen said. “The reforms we have seen over
the past year should add something like 0.4 percent to trend
growth over the medium term. That is in the pipeline.”

Lucrezia Reichlin, a professor of economics at the London
Business School, warned at the same event that Italy faces an
increased loss of confidence from investors if it pursues a tax-cut strategy.

“Assuming that because of the instability there will be an
increase in the interest rates -- we will be very close to the
boundary of stability,” Reichlin said. “We are going to be in
this dangerous area. It will be very difficult for the political
parties to do what they have promised in terms of decreased
taxes.”

The panel discussion also included Mario Baldassarri, a
former president of the Italian Senate finance committee, and
Mediobanca Spa analyst Antonio Guglielmi.